Tuesday, 17 March 2015

US Retail Sales and False Profits - Part 8

The reason that financial markets have seen the fall in prices as indicating a fall in profits, is due to the erroneous view of bourgeois economic theory in relation to the nature of profits. Bourgeois economics sees profit as being an additional amount added on to the cost price of commodities. Exactly, where this additional sum comes from, bourgeois economics is unable to explain. Marxist economic theory can explain precisely where it comes from. It is the difference between the new value created by labour in the production process, and the portion of that new value which must be used to reproduce the labour-power.

In other words, the value of the commodity the workers sell – labour-power – is less than the new value, which that labour-power creates. It is a condition, for the employment of labour-power by capital that this be the case – of course, individual capitalists can always miscalculate, and find that, in reality, the new value produced is less than the value of the labour-power they have bought, but if that persists, so that they make losses rather than profits, the businesses go bust. However, bourgeois economics cannot present such a view, which would be to admit a) that all new value is produced by labour, and b) the profits of capitalists are derived from exploiting workers.

Bourgeois economics, therefore, elides the question of where this profit comes from, and consoles itself with simply providing justifications for its appropriation by capitalists. Those justifications from abstinence to risk and so on, have been discussed in the past. To summarise the conclusion of that discussion, whatever justification might be made as to why capital appropriates profits, none of them explain where the profit itself comes from. In fact, the consistent models of bourgeois economic theory are forced to conclude that if there is perfect competition, profit itself must be competed away!

Marx explains that the reason that the view of profit as an addition to costs takes hold is because this is precisely the form that profit takes for the first forms of capital – merchant capital and interest-bearing capital. The merchant operates on the basis of adding some generally accepted profit margin on to the cost of the commodities they buy from producers, whilst the money-lending capitalist does the same thing by adding an amount of interest on to the money they lend. In fact, many productive-capitalists operate on this basis too, taking their production costs, and adding a similar mark-up to give their selling price.

But, the fact that this is the way these businesses operate, and the way therefore, that reality appears, is not the same thing as this being the underlying reality. A productive-capitalist that has higher than average production costs, for example, will soon find that by adding an average percentage mark-up to determine their selling prices, will leave them increasingly pushed out of markets, as they are undercut by more efficient producers. In fact, they will only be able to get away with this behaviour for so long as demand exceeds supply. If competitors are able to increase their supply, and absent any other market restrictions, these competitors will push the inefficient producer out of the market.

In fact, that can be seen now in relation to oil, and other commodities. The North Sea and other high cost oil producers cannot simply add a given percentage of profit on to the production costs, because if they do, other lower cost producers in the Gulf, for example, will simply meet the market demand. The higher cost producers are forced to sell at the price of production (average cost of production plus average profit) or less if total supply exceeds demand at that price.

In Capital III, Marx also shows how this view is developed as a consequence of the more mature form of capital, and its reflection in bourgeois ideology. The process of concentration and centralisation of capital, that Marx first discusses in Capital I, leads to a process of the expropriation of the expropriators. In other words, just as the big private capitalists expropriated the means of production of the scattered direct producers, and then expropriated even the capital of the smaller and medium sized private capitalists, so these big private capitalists are themselves expropriated by the development of massive, socialised capitals, in the shape of the joint stock companies, the workers co-operatives, and state capital.

Alongside this process goes a social process by which the private capitalists themselves are increasingly pushed out of their social role, as entrepreneurs, as organisers of production. That social function is taken over by professional managers, administrators and technicians. As more and more of these managers are drawn from the ranks of the working-class, with the expansion of public education, so these “functioning capitalists”, entrepreneurs, become less and less differentiated from other workers, a fact that is most apparent within the workers co-operatives, where those managers etc. are themselves employed, by the rest of the workforce. The labour of these managers, then becomes simply a form of complex labour, and their wages takes the form of what Marx calls “profit of enterprise”.

As the private capitalists are removed from this social function, they become reduced to a class of “coupon clippers”, whose only role is then to be providers of loanable money capital, upon which they obtain dividends, and other forms of interest. As the functioning capitalists, the managers, become closer to workers, so these money-lending capitalists are led to appoint another tier of supervision above these managers, whose sole function is to look after the interests of the money-lending capitalists.

These Boards of Directors, and their appointees, such as the CEO and Chairman, are presented as representatives, as the managers of the company, and its interests, i.e. the interests of the functioning productive-capital, but they are not.  Their function is to act as the representatives of the money lending capitalists, who have lent money to the company, i.e. the shareholders.  That is why these top executives continually talk about "enhancing shareholder value" and so on.  It is why, they are as likely to use the company's profits, or even to drive the company into additional debt, not to expand the company's productive-capital, but to buy back shares, so as to ramp up the price of the shares.

As Engels sets out, in his supplement to Capital III, on the Stock Exchange,

"Now it is otherwise. Since the crisis of 1866 accumulation has proceeded with ever-increasing rapidity, so that in no industrial country, least of all in England, could the expansion of production keep up with that of accumulation, or the accumulation of the individual capitalist be completely utilised in the enlargement of his own business; English cotton industry as early as 1845; the railway swindles. But with this accumulation the number of rentiers, people who were fed up with the regular tension in business and therefore wanted merely to amuse themselves or to follow a mild pursuit as directors or governors of companies, also rose. And third, in order to facilitate the investment of this mass floating around as money-capital, new legal forms of limited liability companies were established wherever that had not yet been done, and the liability of the shareholder, formerly unlimited, was also reduced ± [more or less] (joint-stock companies in Germany, 1890. Subscription 40 per cent!)."

And Marx describes, in terms we would recognise today, the true nature of these directors and executives.

"On the basis of capitalist production a new swindle develops in stock enterprises with respect to wages of management, in that boards of numerous managers or directors are placed above the actual director, for whom supervision and management serve only as a pretext to plunder the stockholders and amass wealth. Very curious details concerning this are to be found in The City or the Physiology of London Business; with Sketches on Change, and the Coffee Houses, London, 1845.

'What bankers and merchants gain by the direction of eight or nine different companies, may be seen from the following illustration: The private balance sheet of Mr. Timothy Abraham Curtis, presented to the Court of Bankruptcy when that gentleman failed, exhibited a sample of the income netted from directorship ... between £800 and £900 a year. Mr. Curtis having been associated with the Courts of the Bank of England, and the East India House, it was considered quite a plum for a public company to acquire his services in the boardroom' (pp. 81, 82).

The remuneration of the directors of such companies for each weekly meeting is at least one guinea. The proceedings of the Court of Bankruptcy show that these wages of supervision were, as a rule, inversely proportional to the actual supervision performed by these nominal directors."

(Capital III, Chapter 23)

Marx quotes extensively from the writing of bankers at the time, to show that this material change in conditions also leads to the development of the idea that the only “real” capital is the loanable money capital provided by these money lending capitalists, whose crystallisation, and representation is provided by the banks themselves. On this basis, it is only interest, which represents an expansion of this capital. Marx explains, then how this expansion of capital, and its equation with profit becomes completely divorced from its actual source – the surplus value produced by the workers.

The extension of this, is that just as the price of land is determined by the capitalisation of rent, so it becomes possible to capitalise all other factors of production. I will examine that in Part 9, and how this affects the bourgeois conception of profits.

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